OLD MUTUAL plc Preliminary Results for the year ended 31 December 2000 HIGHLIGHTS

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1 OLD MUTUAL plc Preliminary Results for the year ended 31 December 2000 HIGHLIGHTS Operating profit* increased by 38% to 911 million (1999: 661 million). Asset management operating profit up 158% to 124 million (1999: 48 million). Banking operating profit up 56% to 327 million (1999: 210 million) Life assurance operating profits on continuing operations increased 12% to 478 million (1999: 426 million) and 20% in Rand terms to R5,029 million Underlying life assurance new business embedded value profits increased 16% to 72 million (1999: 62 million). Operating earnings per share* increased 38% in Sterling terms to 17.0 p (1999:12.3p), which equates to a 48% growth in Rand terms to 179.4c (1999:121.4c) Proposed final dividend of 3.1p makes a total for the year of 4.7p (1999: proforma 4.0p), up 18% Embedded value of 5,553 million (R62,831 million) is up 3% in Sterling terms and up 17% in Rand terms. *Operating profit and operating earnings per share are stated before goodwill amortisation and have been calculated using a long term rate of return. Mike Levett, Chairman and Chief Executive comments: 6 March 2001 These are excellent results. We have made significant progress through continued development of core businesses and, through focused acquisitions have established a strong foundation upon which to build our businesses for customer and shareholder value in the years ahead.

2 CHAIRMAN S STATEMENT Commenting on the results, Mike Levett, Old Mutual s Chairman and Chief Executive issued the following: This past year has seen the Group move rapidly to develop its core businesses and build an international presence through acquisitions in the United Kingdom and the United States. Our acquisitions of the Gerrard Group in March 2000 and United Asset Management Corporation (UAM) in October 2000 have strengthened our international platform to complement our formidable base in the South African financial services market. Our operating profit of 911 million 1 has grown by 38%, with our newly acquired companies contributing 33 million in the periods of 2000 for which their results were consolidated. Operating earnings per share has increased by 38% to 17.0 pence and embedded value increased 3% to 5,553 million. The Group was delighted to obtain an A2 senior unsecured issuer rating from Moody s Investor Service in November. This rating is important to the Group in optimising its capital structure through appropriate use of debt finance. Life Assurance Operating profit at our life operations was 478 million, an increase of 12% in Sterling terms (20% in Rand terms). You will remember that the comparative figures for 1999 include a number of one-off positive effects arising from last year s very strong investment market. The underlying value of new business on an embedded value basis increased 16% to 72 million after taking into account the impact of the new tax regime in South Africa and demutualisation effects. The Group reorganised its individual life operations in South Africa into three segments this year to improve service and the quality of products offered to customers. We have also successfully launched a number of individual and group product ranges and bancassurance initiatives, and have managed costs effectively to enhance shareholder value. Internationally, the Group entered into a joint venture in life assurance with Kotak Mahindra in India, in September. We have recently announced the acquisition of Unified Life, which will provide a platform to sell a suite of annuity and term products in the US through brokers. 1 Operating profit is stated before goodwill amortisation and has been calculated using a longer term rate of return. 2

3 Asset Management The operating profit of our asset management businesses increased 158% to 124 million from 48 million in Our asset management business took a significant step forward following the acquisition of UAM for $ 2.9 billion in October. This acquisition added some $200 billion of funds under management. As part of our ongoing review of the business, we have commenced the restructuring of UAM s operations, forming Old Mutual Asset Managers (US) from seven affiliates who, together with Pilgrim Baxter, have entered into new arrangements designed to allow full earnings participation rather than operating in accordance with the revenue-sharing arrangements previously in place. We are delighted with the way the management of these enterprises have endorsed these initiatives. Our private client business has also undergone significant change this year, following completion of the acquisition of Gerrard Group plc for 529 million in March Greig Middleton and Capel Cure Sharp have been relaunched under the Gerrard name and are now under one management. As with any large integration, there are some hurdles to overcome over the short term, however, we are confident of meeting the challenges ahead. The money market operations of Gerrard & King, the discount house acquired as part of Gerrard Group, were wound down over the last quarter of 2000, and its collateral management capability was rehoused under its fellow subsidiary, GNI. Banking The operating profit of our banking business increased by 56% to 327 million from 210 million in 1999, with the main contributor to these results being Nedcor, our 53% owned subsidiary. Nedcor continues to meet world class operational standards, whilst investing prudently in technology and retail joint ventures that will provide future opportunities for growth and development. Following the successful flotation of Dimension Data Holdings plc on the London Stock Exchange in December, Nedcor restructured its holdings in the Dimension Data group, retaining an 8% interest in the listed company. This restructuring resulted in a gain of 356 million being recorded in the profit and loss account as a nonoperating item. 3

4 General Insurance The contribution of Mutual & Federal Insurance Company, our 51% owned general insurance subsidiary, to the Group s operating earnings, benefited from a marked improvement in underwriting results in the second half of 2000, as well as from its 106 million acquisition of CGNU s South African business during the fourth quarter. Investment return was lower as a result of the impact of special dividends on asset values. Mutual & Federal has maintained its position as one of the leading general insurers in South Africa. Market factors The Group s presentation of operating earnings using a long term rate of investment return smooths out the volatile effects of market movements on the Group s results for the year. The effect of actual market movements on shareholder investment values is depicted as short term fluctuations, which were an adverse 180 million in 2000, principally reflecting movements in the JSE All Share Index. Profit after tax and minority interest for the year was 506 million compared to 1,066 million for Whilst operating earnings in South Africa have been strongly positive in Rand terms, their contribution to Group profit has been affected by the continued depreciation in the Rand/Sterling exchange rate, which, using average rates, is some 7% down on This reduced operating profits for 2000 by approximately 59 million, compared to the average exchange rate that prevailed in Management/Employees I am pleased that in the last year we have significantly strengthened management of the Group. Jim Sutcliffe joined as Chief Executive, Life, in January 2000, and Julian Roberts as Group Finance Director in August 2000, following Eric Anstee s appointment as Chief Executive, Financial Services. Richard Laubscher, Chief Executive of Nedcor, was appointed as an Executive Director of the Company from 1 January In addition to appointing a new Chief Executive for our South African Life operations, we have recruited key personnel for our UK businesses, and taken important steps to restructure and strengthen management within our newly acquired US operations. To all our new colleagues in the Group, I would like to extend a particularly warm welcome. I would also like to thank all employees of the Group for their contribution to Old Mutual plc in an exciting and successful year. 4

5 Dividend The directors are proposing a final dividend of 3.1p per share, making a total dividend for the year of 4.7p per share, an increase of 18% on last year s proforma. Using current exchange rates, this represents a final dividend of 32.7c and a total for the year of 49.5c, an increase of 26%. The dividend is covered 3.6 times by an operating earnings per share of 17.0 p. The dividend, which is subject to approval at the AGM on 18 May 2001, will be paid to shareholders on the register at the close of business on 20 April 2001 (record date) for all the exchanges where Old Mutual plc s shares are listed. The shares will trade exdividend from the opening of business on 18 th April The local currency equivalents of the proposed dividend for shareholders on the South African, Malawi and Zimbabwe branch registers and the Namibian section of the principal register will be determined using exchange rates on 12 April The conversion rates will be announced by the Company on 17 April Outlook The Group set itself a great deal to accomplish in 2000 and has worked hard to drive through its strategy. The economic environment affecting our businesses remains important to future performance, and conditions may prove challenging in We are confident however that the foundations we have established this year provide a sound platform for building value for the future. MIKE LEVETT Chairman & Chief Executive 6 March 2001 Media and Analyst Enquiries:- Old Mutual plc Tel: Mike Levett, Chairman & Chief Executive Julian Roberts, Finance Director julianr@omg.co.uk James Poole, Investor Relations jamesp@omg.co.uk College Hill (UK) Tel: Gareth David gareth.david@collegehill.com Tony Friend tony.friend@collegehill.com College Hill (South Africa) Tel: Brendan Templeton Brendant@collegehillir.com Nicholas Williams nick.williams@collegehill.com 5

6 BUSINESS REVIEW Life Assurance This year has seen significant progress in our life assurance businesses. In South Africa we have appointed a new, young management team following Gerhard van Niekerk s well earned retirement, reorganised the business with much greater customer focus, and significantly extended our technology platforms. Outside South Africa we have acquired licences to start operations in India and the USA and built new distribution relationships in the Far East. We achieved world class results from our continuing life businesses with operating profit up 12% at 478m, a return of 23% on internal capital allocated (1999:20%), and the embedded value of new business topped 74 million, with the margin on sales being 22%. After adjusting for the effects of demutualisation premiums and the new South African life office tax regime, the underlying value of new business was up 16% in Sterling terms. The increase underlying operating profit in Rand terms was 24%. The growth in operating profit derived mostly from capital charges on the high asset base arising from the strong equity markets during 1999, and tight expense management. New business annual equivalent premiums (valued for embedded value purposes) were up 3% in Sterling terms, with sales in South Africa up 16% in Rand, excluding the windfall effects of the demutualisation in both years. Single premiums were strong both in and outside of South Africa, and group business recurring premium sales more than doubled. South Africa Group Business Financial performance Our Group business, Employee Benefits, delivered an excellent operating profit for the year, which at 85 million was 27% higher than the 67 million achieved in This performance principally reflects the impact of a high opening asset base, coupled with improved fee levels and expense savings from last year s Project 500 initiative. The value of new business increased 7% from 27 million to 29 million, although margins fell from 49% to 38% primarily as a result of business mix changes. New recurring business premiums were 48 million, an increase of 129%, compared to 21 million in 1999, principally arising from a higher volume of risk products sold. 6

7 Single premiums (excluding certain market-linked business, where profits are reported under Asset Management) were lower when excluding the reinvestment effects of demutualisation share sale proceeds in both years. Employee Benefits continued to lead the Guaranteed Fund market in 2000 and declared bonuses for the 1999/2000 year giving policyholders a return of 16% in our flagship product, following strong investment performance in that period. Product innovation The group developed a number of innovative products during the year. Symmetry, launched in August, provides a multi-manager capability to complement our with profits range, and is already a growing presence in the multi-manager market. Synergy, launched in May, is a new short-term disability product. October also saw the launch of our optional risk benefits product (ORB), which offers members flexibility of product choice within a group risk arrangement. Further progress has also been made in the area of group retirement fund administration. In June we launched Splitfunder, a computer application that ensures the efficient transfer of member-level investment choices to a wide choice of asset managers. During the second half of the year we added the capability of electronic data and money exchange known as Dataway. This has provided the business with a more efficient, web-enabled, customer service and improved controls. Moving forward The market for outsourcing pensioner liabilities remains strong, although the uncertainty surrounding regulation of distributions of pension funds surpluses is holding some clients back. Employee Benefits has the products and financial strength to continue attracting significant flows from this market. In addition, the market for more flexible open fund arrangements is developing and we are rapidly adapting our products to meet this demand. We will continue to invest strongly in providing service improvements through better IT systems. Individual Business Financial performance Operating profit of 165 million was 2% lower this year than the 168 million earned in 1999, although 13% higher in Rand terms after excluding costs of 13 million previously reported as shareholder expenses. Higher margins were earned from high asset levels in the first part of the year. 7

8 The value of new business at 38 million was 36% higher than the 28 million in 1999 primarily as a result of a reduction in the cost of financing acquisition expenses. New single premiums, at 805 million, increased 15% from a high 1999 base of 697 million with the Investment Frontiers range in particular continuing to attract flows in excess of 540 million. Total individual recurring new business premiums of 131 million were disappointing, at some 7% below 1999 levels of 141 million. This principally reflected the adverse impact of the sales force reorganisation on agent headcount and deliberate action to exit unprofitable business areas. Agent numbers have, however, now stabilised and the planned rollout of a new sales methodology was completed in October. Some improvement in volumes was evident in the second half of the year and importantly, persistency, average case size, and agent productivity trends were positive. Within these numbers, our affinity group business, Group Schemes, continued to perform well, with new business premiums this year up 27% on the prior year. Alliances with Peoples Bank and JD Group, and other initiatives into the private sector represent a significant opportunity for future growth. Product innovation This year has seen the development of a number of innovative new products for the individual client. In June 2000, we launched the Essential Savings Plan, which is an affordable savings plan for entry-level investors and, in November, we launched the Investment Horizons range of savings and investment products for the middle market. We have also made considerable progress in the second half of 2000 building our bancassurance joint venture with Nedcor. In addition to the Peoples Bank/Group Schemes arrangements, we are embarking on a series of product and distribution initiatives aimed at middle and high-income customers. Following the launch of our Mint high net worth brand in July, we have established a specialist salaried advisory service aimed at improving our penetration in this competitive high value market. Regulation Following concerns over increasing debt-levels of Government employees and the activities of unlicensed micro lenders, the South African Government announced, during 2000, plans to phase out non-statutory deductions from the payroll of government employees (Persal). This method is also widely used by the Group for premium collection, particularly in our Group Schemes business. We have played an important role in the dialogue between Government and the life industry to mitigate the effects on our customers and welcome its intention to continue to allow insurance premiums to be deducted from government employee payrolls. 8

9 Moving forward The individual market is changing rapidly in South Africa. The Group is therefore planning for further product launches in 2001 aimed at ensuring a comprehensive and competitive range of savings, risk and investment products in each market segment. At the same time, we are moving our products on to new-generation administration platforms, pioneered for our successful Investment Frontiers range, and aim to deliver significantly improved service levels. We also aim to expand our market reach by growing our Personal Financial Advice distribution force in the middle income market without compromising on the higher entry requirements introduced following the restructuring of the agency sales force, and by building a new sales team focused on the emerging middle market. Technological developments This past year has seen an aggressive roll out of our deployment of Information Technology in key areas such as rapid product development systems, and e- commerce where we launched our 4 th generation website and low cost administrative platforms. The launch of Investment Horizons and the Essentials product range on a lower cost administrative platform was a key feature, together with the web enablement of Investment Frontiers which now allows our customers to interrogate their accounts and monitor performance on-line. In addition to our own developments in the e-commerce arena, we jointly formed Miraculum, in August, with Dimension Data and Nedcor, to compete in the growing electronic procurement services market. We also acquired a 20% strategic shareholding in Internet Solutions, the leading business to business internet service provider in South Africa, in which Nedcor also holds a 20% stake. These investments will secure access to scarce skills and intellectual capital within the rapidly evolving e-commerce marketplace. Customer focus In October we announced the re-organisation of the individual product businesses and distribution channels around major customer segments, High Income, Middle Income and Emerging Wealth. This change has given us the opportunity to build a management infrastructure focused on the specific needs of each of our major customer segments. This new customer focus called for a change in culture within the organisation which is being driven by an initiative, Siyakhula (a Xhosa phrase which means "We Are Growing"), recently rolled out to our employees. It aims to harness our employees' energy within our overall business strategy and to ensure that the virtuous circle of satisfied customer needs, shareholder value, return to the community and employee development is completed. 9

10 Investing in People During the year Gerhard van Niekerk announced his retirement as managing director of Old Mutual South Africa, effective 1 March 2001 following a long and distinguished career. We are all grateful to him for the huge contribution he has made over the years. He is succeeded as MD by Roddy Sparks, whose 15 years at Old Mutual have included appointments as Executive General Manager of life investments, finance and most recently, responsibility for the non-life businesses. Also appointed were Peter Moyo, as Deputy MD responsible for institutional business, and Peter de Beyer, Deputy MD, focusing on individual business. In February 2001 the Group established Old Mutual Business School, which will provide educational opportunities for staff at all levels, and significantly enhance our skills to deliver better value products and services for customers, and profitable growth to our shareholders. Rest of the World International and Offshore In 2000, our international and offshore expatriate businesses embarked on a fresh strategy, which organised the Group as a provider of quality single premium bonds and multi-manager offshore unit trusts into South Africa, the Far East and other markets. We have made considerable progress focusing our product range on high quality single deposit offerings, with both internal and external asset management and we teamed up with Nedcor in the Far East to launch a range of innovative unit trust products. In addition to developing our core operations, during 2000, we started work on a project to bring localised versions of our South African Investment Frontiers product to the UK. This product is expected to be launched towards the end of In India, our joint venture with OM Kotak Mahindra was one of the few companies to receive its licence in December, and we are well advanced in the development of products and the building of the sales and service teams. In the USA we acquired a widely licensed company Unified Life in February 2001, which will provide a platform to sell fixed and equity-linked annuities. We have hired a powerful team of executives for this venture led by Guy Barker, previously Chief Executive of Natwest Life in the UK and before that Chief Actuary of Jackson National in the USA. 10

11 Rest of Africa The Group s operations in Zimbabwe continue to suffer from political turmoil, which was heightened this year by disturbances surrounding the General Election. Our business, which is the largest financial services business in the country, continued to be profitable, but rapid currency devaluation has significantly reduced its contribution to the Group s results. Our Namibian business made steady progress. FINANCIAL SERVICES The Group s asset management capability took a significant step forward in October with the acquisition of United Asset Management Corporation (UAM), one of the largest independent investment management organisations in the world. The US market is the world s largest both for institutional and retail/individual assets and the acquisition gives the Group a diversified range of investment managers, styles, asset classes and clients and now makes the Group one of the top 30 asset managers in the world, classified by funds under management. Total operating profit across the financial services segment of 124m increased 158% from 48 million in 1999 due primarily to a contribution of 57 million from businesses acquired in the year. A Gerrard Group profit of 13 million (after charging integration costs of 14 million), was included in Group earnings from 31 March 2000, and earnings of 44 million were generated by UAM from 5 October Asset Management Worldwide Our asset management businesses performed well in 2000, with operating profits at 97 million growing 116% from 45 million in Excluding the contribution of UAM, existing operations produced a 18% increase in profit, with Old Mutual Asset Managers SA and Old Mutual Unit Trusts performing well. Funds under management increased by 276% to 169 billion primarily as a result of the UAM acquisition. United Asset Management Financial Performance UAM operating profits of 44 million for the period since acquisition represent a strong result in light of difficult market conditions in the last quarter of the year. The UAM Group ended the year with 119 billion of funds under management, down 14% from acquisition, principally reflecting the Nasdaq driven lower market levels during the fourth quarter and the 6 billion of funds which left the Group through planned divestiture. In spite of the market downturn, net cash flows at Pilgrim Baxter were positive, as the diversity of Pilgrim Baxter s product range softened the market effects. The trend toward value managers also became increasingly apparent as cash out-flows from these managers slowed in the last quarter. 11

12 The investment performance of UAM s firms during the year reflected the breadth of talent and the full spectrum of capabilities within the organisation. Whereas growth-orientated managers in the US performed well in the period of market growth during the first quarter, OMAM(US) s value-orientated managers, Barrow, Hanley, Mewhinney & Strauss, and NWQ Investment Management together with certain other UAM firms, achieved superior results during the market s move to value in the last quarter. Restructuring Working closely and cooperatively with affiliate senior executives, the Group successfully completed the reorganisation of UAM into three focused groups: - Old Mutual Asset Managers (US): seven affiliated firms providing focused, multi-style, multi-product capability; - Pilgrim Baxter & Associates, our major retail funds franchise and distribution platform; and - A strategic group consisting of the remaining UAM affiliates providing a wide variety of capabilities, primarily to the institutional marketplace. In November 2000, we announced the restructuring of our relationship with Pilgrim Baxter & Associates. The restructuring moved the company from a historical revenue-sharing model to profit sharing, in order to align incentives with the Group s objectives. Since then, we have also announced similar arrangements whereby Acadian Asset Managers, Analytic Investors, Barrow, Hanley, Mewhinney & Strauss, Clay Finlay, Dwight Asset Management, NWQ Investment Management and Provident Investment Counsel all moved to a profit sharing model under OMAM(US). These affiliates will work together, and with our other international asset management businesses, to meet client needs and seek opportunities for co-operation. The remaining UAM affiliates are being carefully reviewed and evaluated to determine the most appropriate future strategy for each firm. These discussions encompass a range of options, including joining OMAM(US), remaining indefinitely as a stand-alone firm inside the Group, merging with another UAM firm, or possible alignment with other third parties. The process of working with the firms is collaborative, keeping in mind the needs and interests of the firms clients, principals and employees. New opportunities Since acquisition we have further developed some research and development initiatives already underway in UAM. In particular, we have established eseclending Securities as a separate company, to be based in our Bermuda office and targeted to create a new globally-operated internet-based auction system for securities lending. The first auction with our US partner CalPERS took place very successfully in October

13 Moving forward Going forward, there will be many opportunities for our asset management businesses worldwide, as the Group takes advantage of the closer links with UAM affiliates, and continues its restructuring programme. Our strategy focuses on providing our institutional and retail clients with high standards of performance and service to build value and maximise cross-business synergies, particularly between Gerrard and UAM. Old Mutual Asset Management South Africa Financial performance OMAM(SA) delivered excellent results this year with operating profits of 19 million, up 68% in Rand terms from This principally resulted from higher market values throughout the first half of the year, focused expense management, and enhanced overall fee levels from new and existing mandates. Relative investment performance in South Africa, whilst not as strong as the previous year, was satisfactory across the range of products during the year. For the second year running, OMAM(SA) was rated the No.1 fund management company in South Africa by the management of listed corporations in the annual Reuters Survey on Global Emerging Markets. Old Mutual Unit Trusts (OMUT) delivered excellent results this year, with operating profit of 16 million, up 40% in Rand terms on the previous year. This result was in spite of poor JSE performance as investor flows were directed to global funds, with OMUT benefiting from strong trading profit and the timely launch of higher margin offshore funds and the continued success of its range of Fund of Funds products. Gross sales amounted to R11.5bn, an increase of 31% over the previous year. After achieving record inflows in the first half of the year as a result of the launch of ten Rand-denominated global funds, these funds reached exchange control limits in August and were consequently closed. This, together with a change in sentiment by wrap fund managers, resulted in a slowing of sales during the second half. Launch of FundsNet 2000 also saw the launch in November of FundsNet, an Internet-based investment platform giving investors and intermediaries 24-hour access to an extensive range of unit trusts from Old Mutual and other leading South African asset managers. 13

14 Rest of world Re-launch of Old Mutual Asset Managers (UK) The year 2000 represented a year of significant and exciting change for OMAM(UK), following a strategic review of the business, coinciding with the move of the previous CEO, Kevin Carter, to the USA. John Ainsworth was appointed Chief Executive toward the end of the year and brought with him a highly regarded team of investment professionals. The team is now working to establish OMAM(UK) as the Group s UK asset management platform and to aggressively grow its third party specialist institutional mandates and retail business. In November 2000 the European fund was relaunched, led by Adrian Farthing, and in February 2001, under Ashton Bradbury, the team successfully launched a new UK Select Smaller Companies Fund. Gerrard Private Client UK Merger and Restructuring In March 2000 the Group s offer for the Gerrard Group was finalised adding Greig Middleton s private client business to Capel Cure Sharp Limited. Throughout the year our management teams have worked to integrate and merge the two businesses at all levels, and co-locate their operations in London and selected branches. In December, the group re-branded Greig Middleton and Capel Cure Sharp under the Gerrard name. The combined Gerrard business is the UK s largest high net worth private client asset manager, offering a wide range of discretionary, advisory and managed services from 31 different office locations. Financial Performance Operating profit, before integration costs of 14 million was 26 million for the year, incorporating a full year s contribution from Capel Cure Sharp and nine months contribution from Greig Middleton. Operating profits from our legacy CCS business were adversely affected by regulatory and system issues, which arose from the high business volumes experienced in the first half. These issues resulted in changes of management of the business and a 4 million charge for additional costs following the recruitment of temporary resources by the Group to manage the problem and rectify the issues involved. We have strengthened the management team during the latter part of the year following the retirement of Richard Bernays. Stephen Clark was appointed Deputy Chief Executive and Chief Operating Officer of Gerrard in August and Clive Boothman was appointed Chief Executive in September A new Chief Financial Officer, Peter Meyer, was appointed in December

15 The restructuring plan following the merger remains on track to secure improved revenue sources and future annualised cost savings of approximately 15 million from a total restructuring cost outlay of 25 million. The timing of delivery has been delayed as a result of a required change to our IT strategy for the combined group to secure operational platforms that are sufficiently robust to deal with high trading volumes similar to those experienced in the first quarter of Revenues of 149 million were 6% better than the previous year on a like-forlike basis, despite the transfer of revenue from Institutional and Corporate business from Greig Middleton to Old Mutual Securities and GNI during the year, as part of the post acquisition rationalisation. Commissions continued to be strong and, in spite of flat to lower market and fee income levels, improved as charging structures were extended throughout our client base and clients moved toward more discretionary services. CCS unit trusts performed well, particularly in the first quarter of the year. Market conditions during the year to December 2000 were challenging as the APCIMS balance benchmark fell by almost 5% and the FTSE fell by nearly 10%. Total funds under management at 20.9 billion increased 118% from 9.6 billion in 1999, principally through the acquisition of Greig Middleton, however, market movements and net fund outflows have somewhat offset this effect. Moving forward The continued integration of the Capel Cure Sharp and Greig Middleton businesses offers exciting opportunities to leverage the different skill bases within each organisation. Over 2001, it is our intention to produce a broader and enhanced range of both products and services and to leverage the now rebranded Gerrard Investment Funds. Significant focus will also be placed on successful delivery of several key transaction processing and client service infrastructure projects. Other Financial Services Operating profits of 15 million for other financial services businesses were either purchased following the Gerrard acquisition or earned by newly established businesses. GNI Trading in GNI s business has been satisfactory despite market conditions, which saw volumes at low levels in the second half of the year. Operating profit of 8 million for the nine-month period ending 31 December 2000, benefited from further development of equity products. GNI now houses the collateral management arm of Gerrard & King, the former discount house business of the Gerrard Group, which was substantially wound down at the end of GNI remains at the centre of technological innovation for the asset management division. 15

16 GNI Fund Management launched two guaranteed multi-advisor funds, GNI European Funds 1 and 2, in August and September. The two funds have a combined value of $48 million. The funds provide investors with exposure to both equity derivatives and commodity futures trading, and both finished the year at new peaks. Old Mutual Securities Old Mutual Securities (OMS) was launched in June 2000, following the combination of Greig Middleton s Corporate and Institutional and Albert E Sharp Securities businesses into one entity. Since then the group has developed a market making capability covering more than 300 stocks and gained 30 new corporate broking clients. Revenues have increased strongly to 19m from 9m in 1999 reflecting the increased level of activity and product diversity. OMS benefited from high levels of activity in the early part of the year, particularly in the IT sector, however, this reduced in the second half of the year, when more traditional sectors came back into favour. Market-making in stocks started in February 2000 and have made a strong start. Prospects remain good as our product range widens to cover all sectors that exhibit growth potential in the small and mid-cap areas. Old Mutual Specialised Finance (OMSFIN) OMSFIN has grown rapidly this year, with after tax earnings of 6 million in 2000 from its corporate lending, securities lending and structured product activities. The company is well positioned to continue this trend through the growth of existing operations in South Africa and introduction of new products. BANKING Banking profit of 327 million increased 56% from 210 million in 1999, principally reflecting the impact of special provisions and property writedowns of 94 million made by our 53% subsidiary Nedcor last year. Financial Performance Nedcor s contribution to Group s operating profit before minority interests was 337 million, up 57% from the 215 million in In spite of the continuing high interest rate environment in South Africa, which continued to slow business volumes, Nedcor reported a strong result this year generating a 26% increase in headline earnings from R2,406 million to R3,027 million and an increase of 24% in earnings per share. Nedcor also reported R98 million in exceptional charges relating to branch property write downs and leasehold premises, which have been included in the Group s operating profit for reporting under UK GAAP. 16

17 Net interest income was reported as showing an increase of 9% in the year in spite of a decline in interest margin from 3.64% to 3.46%. The margin was negatively affected by the reduced endowment effects of lower interest rates on free capital and the redeployment of funds into strategic investments. Noninterest revenue continued to grow strongly, increasing by 23% and reflecting a strong performance overall and excellent foreign exchange income. Nedcor s cost to income ratio fell from 51.7% to 50.0% as a result of continued successful cost management, and debt provision levels stabilised this year, the charge increasing by 5% year on year after allowing for the higher provisioning levels within the acquired FBC Fidelity Bank. Nedcor exchanged its 25% interest in Dimension Data International for shares in Dimension Data Holdings plc during the fourth quarter, generating an exceptional profit of R3.7 billion ( 356 million). The increase in shareholders funds caused by the exceptional profit has resulted in the reported overall return on equity, on a South African GAAP basis, reducing 1.3% to 24.0%; however, excluding technology investments, the adjusted return on equity for the banking operations is 25.3%, up from 24% last year. The results of Gerrard & King s operating profit of 2 million are included in this year s banking results. However, following the announcement of its merger into GNI in November, Gerrard & King has been winding down its banking book. The results of its collateral management division, which moved into GNI in 2000, will be reported as part of other financial services results in future. Business development Nedcor developed three non-linear strategies during the year, firstly by forming alliances and partnerships with best-of-breed companies in their fields to develop the retail banking network. In August, Nedcor acquired the business of FBC Fidelity Bank Limited which has been merged into Peoples Bank Limited and is now one of the largest financial institutions serving the previously underbanked population of South Africa. Secondly, Nedcor formed important alliances with: Capital One to utilise its unique data mining capabilities; Old Mutual s Group Schemes to offer assurance and savings products; furniture retailer J D Group and Pick n Pay Financial Services to extend the product range and outlets; Imperial Holdings through the purchase of 50.1% of Imperial Bank, a specialist asset-based finance house; and Virgin Active, through the acquisition of a 30% private equity interest in the Virgin Active South African health and fitness business. Secondly Nedcor s technology and outsourcing division moved towards commercialisation as a standalone entity. This will enable it to utilise capacity more widely and create the potential for the outsourcing of IT and processing needs of other financial institutions. 17

18 Thirdly Nedcor has also seen exciting developments in investments in strategic IT companies and other business enhancing partnerships. This led to further investment in Dimension Data and new investments in The Internet Solution, Aplitec, IQ Business Group, Nihilent Technologies and Miraculum, all new technology businesses that are expected to add value to the traditional business in future. Moving forward The improvement in the economic climate should have a positive effect into the future. Cost control and increased efficiencies, benefits from alliances and a continued drive to improve client service should lead to market share growth. These factors, together with anticipated growth from Nedcor s strategic investments, should contribute to continuing positive results. GENERAL INSURANCE Financial performance Following a difficult first half due to weather-related losses, our 51% subsidiary, Mutual & Federal, recovered well in the second half as rating increases were passed into the marketplace and claims incidence and severity improved. The group s underwriting result for the year was marginally positive, compared to a 3 million loss reported at the half year. Premium income rose 18% from 258 million to 305 million, largely from the inclusion of the results of the acquired CGU Holdings from October, along with the benefit of rate hardening in the market. Expense management remains an important feature of the group s performance, with levels being contained well this year. The fall in operating profit from 59 million to 44 million principally reflects the impact of currency effects and a special dividend, which have reduced the asset levels upon which long term investment returns are earned. Corporate development Continuing with its strategy of consolidation in general insurance, in October, Mutual & Federal acquired CGU Holdings for R 1,206 million ( 106 million). The results of CGU Holdings were incorporated in its results from this date. Also, as part of its capital restructuring plans, in November, Mutual & Federal announced a special dividend to shareholders of 71 million. Notwithstanding this, the Group s capital position remains very strong. 18

19 FINANCIAL REVIEW This report highlights some of the key features of this year s financial statements and describes how the significant changes that took place during 2000 affected the Group from a financial perspective. Operating profit presentation In accordance with common UK industry practice, in order to facilitate the evaluation of performance, we have shown operating profit and operating earnings per share before the impact of short term fluctuations in investment return, non-operating items, and goodwill amortisation. Acquisitions The Gerrard Group acquisition was funded by 98 million of loan notes and 431 million of internal resources. The $2.9 billion UAM acquisition was principally debt financed through a $1,600m revolving credit facility with a syndicate of banks, issuances of $400 million of Medium Term Notes, and other internal resources. Pilgrim Baxter s initial re-equitisation costs (see below) were funded by placing 153 million worth of new ordinary shares, with future payments expected to be met out of internal resources. UAM operated with 41 separately governed affiliates where the effective economic interest to UAM was restricted to a share of revenues. Since acquisition we have taken steps to realign the interest of the Group with those of the affiliates by a process of reequitisation which moves our relationship with Pilgrim Baxter and the OMAM(US) affiliates from revenue sharing to an earnings-linked business model. The transaction with Pilgrim Baxter was in three parts: initial payments of $110 million and $111 million, for 52% of revenues previously owned by management: a further payment of $420 million, (payable at the option of the Group and to be exercised by the end of the third quarter) for the remaining 48%, and a grant of $170 million in phantom stock. Consideration other than the initial payments, together with $129 million relating to OMAM(US) affiliates, is structured to be paid over the next seven years, and has been capitalised into goodwill in accordance with UK GAAP. Goodwill is being amortised over 20 years. Other shareholders income/(expenses) These items principally represent long term investment return of 17 million earned on shareholders funds, offset by financing costs of 32 million and other shareholder costs of 47 million, which include business development costs of 6 million. 19

20 Taxation The Group s effective tax rate (based on the tax charge as a proportion of profits on ordinary activities before tax) of 18% is 12% lower than the UK standard corporation tax rate. This is primarily due to the positive effects of tax-exempt income earned by the Group s life assurance and banking businesses in South Africa and the impact of brought forward tax losses in our South African life businesses, partially offset by STC payments on distributions. Non-operating items Following the restructuring of Nedcor s interests in the Dimension Data Group, the Group realised a gain of 356 million. This has been recorded in the profit and loss account as a non-operating item. Earnings Per Share The Group s operating earnings per share based on a long term investment return before goodwill amortisation has increased by 38% from 12.3p in 1999 to 17.0p. This increase principally reflects the strong performance by our life and banking businesses and the one-off charges relating to pensions mis-selling ( 50 million), special provisions and property write-downs ( 94 million) recorded in Earnings per share is calculated using an average number of shares in issue during the year of 3,373 million (1999 number of shares: 3,127 million). These shares exclude 88 million unvested shares held in employee share trusts. Dividends The Board recommends a final dividend of 3.1p per share, which, if approved at the AGM, will bring the total dividend per share for the year to 4.7p. This represents an 18% increase over pro forma Dividend cover (based on smoothed operating profits) at this level is 3.6 times ( times). Currency and Markets The principal currency affecting the Group s operations is the Rand. Depreciation in that currency against Sterling over the reporting period was 14%, with the exchange rate finishing at R11.3/ at the end of the year, compared to R9.9/ at the beginning of the year. Our current policyholder charging and asset management fee earning arrangements determine that the Group s earnings are dependent to a significant degree upon asset values, which are themselves determined by world stock markets. The results benefited from the high asset values generated by a strong 1999 South African equity market, which saw the JSE All Share Index rise by 57% during that year. Since the acquisition of UAM, the Group s earnings have also been affected by movements in US equity markets, particularly those of Pilgrim Baxter, which are closely related to the Nasdaq index. 20

21 Embedded Value Embedded value is the sum of the shareholders net assets adjusted to reflect listed subsidiaries at market value, and the present value of the future after tax profit from the life business written and in-force at the valuation date, adjusted for the cost of holding appropriate solvency capital. The change in the embedded value over the period, adjusted for any capital raised and dividend provided for, gives an economic measure of performance. Embedded value is not an appraisal value, so does not include any value for policies not written at the reporting date. The methodology also does not record any additional value for linked investment type contracts where profits are recorded under asset management, nor any additional market value not reflected in the books for non listed subsidiaries. Embedded value increased 3% during the year from 5,414 million to 5,553 million as positive Rand growth was offset by adverse currency movements. The main contributors to the Rand growth of 17% were the strong growth in Nedcor s share price, strong new business value, and the effect of assumption changes which crystallised positive experience variances. Long Term Investment Return The long-term rate of return used is 14% ( %) which is based upon actual historical investment returns earned on our South African portfolio. This rate is applied to a rolling average of investible assets adjusted for shareholder cashflows. The return has been translated into Sterling, with other profit and loss account items using the average exchange rate of R10.5/ for this year. Capital During the year, there were some important changes to the Group s capital. In July we gained High Court approval to cancel an amount equal to 500m from the share premium account and to increase distributable reserves of Old Mutual plc, and in October, Mutual & Federal redistributed capital through payment of a R750 million special dividend ( 36 million Group share). In order to fund the $110 million initial Pilgrim Baxter re-equitisation payment, the Group placed 105 million new ordinary shares, simultaneously with 25 million existing issued ordinary shares, representing shares held in connection with satisfying claims and errors in accordance with the Scheme of Demutualisation. Solvency The Group s life assurance and asset management businesses all operate within regulatory environments, which set minimum levels of required capital for the purposes of policyholder and customer protection. All the Group s main operating businesses have solvency levels comfortably in excess of the local regulatory minimums. In November 2000 the Group received an A2 Moody s rating while OMLAC(SA), our principal South African life company, received an Aa3 rating for domestic liabilities. Mutual & Federal enjoys an AAA rating and Nedcor had a tier 1 capital ratio of 11.5% at 31 December 2000 ( %). 21